Tuesday, 26 March 2019

Do we benefit from low wages in other countries? Discuss!

TBH had a discussion with X (name escapes me) recently, which raises some interesting topics which we thought might be of interest. It went along the following lines:

X: "It is wrong for developing countries to subsidise their exports and dump cheap goods in developed countries. That hurts the non-subsidised businesses and their workers, as they are paying extra taxes to fund the subsidies which benefit exporters and overseas importers"

Non-contentious so far.

"This also unfair competition for businesses in developed countries, and business failures lead to unemployment. Therefore it is OK for developed countries to impose tariffs on such goods to cancel out the subsidies."

TBH, disagreeing: "Trade is always good, tariffs on trade are always bad. If we can buy cheap steel, cheap cars, short-term that is bad for our domestic steel or car makers and their workers; medium term it means we can move to producing higher value-added things instead, so overall is a win for us. Imposing tariffs does not help the people being oppressed in other countries, it just means that the benefit of the overseas subsidies goes to our government instead of to us as consumers."

In which I would agree with TBH. You can extend X's logic to any cheap imports from low wage countries, so it is clearly wrong. Who's going to make the decision whether
a) goods from a certain country are cheaper because workers are being exploited; or
b) goods from a certain country are cheaper because they are more efficient?
But something else I have been mulling over is the widely held assumption that we benefit from low wages in developing countries because we can buy cheap stuff. The price of clothing or bog standard new cars has not increased in nominal terms for decades.

Which looks like a very good thing to me. Some go further and 'worry' about the day a few decades hence when wages and prices in e.g. the Far East have risen to Western levels.

Why is that a bad thing? When that day arrives it will be because business and workers in those countries are producing more stuff, either more of the same stuff or more value-added stuff.

So there's more stuff to go round; Westerners will be getting a smaller share of a much larger pie. Overall, people in the new developed countries will be better off (clearly) and people in the old developed countries will also be better off (however marginally).

Therefore, the conclusion must be that while we benefit from low wages in developing countries (first discussion) and shouldn't impede that with tariffs and quotas, we'll benefit even more once their wages have risen to our levels (second train of thought).

Allowing free trade* with developing countries is the main thing we can do to help them develop; once they have developed, even X's weak argument for tariffs and quotas falls away, so it's game set and match for free trade, as far as I can see.
* "Free trade" does not mean developing countries should be forced to allow Western imperialist capitalists (mainly banks and miners), to steal assets, generally rent seek and wreck developing countries of course, quite the opposite.


Lola said...

Export subsidies are a tax on the workers of the country that exports and a benefit for the importer. That is it is 'poor' countries sending money to 'rich' countries.

OTH developing low wage because low skill countries offer low wages because they are low skilled. Buying from them lets them develop.

(That's the same reason why minimum wage laws are bad. It makes people offering themselves for work at the market price law breakers.)

Mark Wadsworth said...

L, agreed (except the minimum wage bit, which is more nuanced).

Shiney said...


Why is min wage thing more nuanced?

It effectively sets a floor on the price of labour which will lead to the market not clearing as it MUST be above the market equilibrium. Whether that is a good or bad thing depends on your POV.

As I think you've said in the past... full employment is the best way to guarantee a 'living wage' and we only will get close to that when taxes on production and consumption are reduced and taxes on economic rent increased.

Mark Wadsworth said...

Sh, see here.

Mark Wadsworth said...

Sh, for clarity, instinctively I am against NMW, but it didn't have the deleterious effects predicted, that post just explains a possible reason. So I am now more agnostic.

ThomasBHall said...

So to be fair- X (Theo) and I were discussing currency manipulation- and dealing with currency cheats- which carried on into a discussion on free trade and protectionism. My argument was broadly that countries which artificially suppress the value of their currency (China?) are really shortchanging the workers in that country i.e. the factory is paying less in wages than it would otherwise. Ergo, the losers are the workers. The importing country is getting stuff cheaper. Theo is very much a free marketeer, so discussions on protecting against currency cheats are interesting... here is what he has to say:

I never argued to protect against “cheap” goods; and wouldn’t, because I support free trade.

the discussion was never about “exploitation of low wages” or “opposing free trade with the developing world” – but specifically protection from currency cheating – China and Germany specifically.

Re: the conclusions – it can easily be determined where goods are cheaper due to the use of an artificially devalued currency (as opposed to innate efficiency). The logic of comparative advantage requires trade on an equal footing, a devalued currency distorts this –
e.g. Country X produces good A more efficiently and Country Y. Country X therefore produces more of good A. To “counter” this, Country Y devalues its currency – as a result, good A produced in country Y becomes comparatively cheaper without any increase in comparative efficiency.
The result is that Country X produces less of good A, that it produces efficiently; and Country Y produces more. Resources are now misallocated AND LESS VALUE OVER ALL IS PRODUCED (Deadweight loss).

Currency cheating should be opposed categorically even on the most base material argument – less value is produced than if trade were allowed to continue naturally. The best means of reducing the incentive to cheat is to attempt to reverse the benefits to the cheat – tariffs on their exports to raise the price point back to where it would be if there had been no intervention.

The secondary, and more qualitative, reason to oppose currency cheating is that the imbalances created harm domestic industry THAT IS ECONOMICALLY COMPETETIVE under normal economic circumstances. The result of not ‘protecting’ the industry is a loss of economic efficiency. This is a different argument to ‘traditional’ protectionism – which aims to preserve inefficient industries from market competition.

However – there are even strong human arguments FOR some protection of industry (both sunrise and sunset). The simple classical model of trade as an absolute benefit ignores the complexities of the labour market (“in the long run, we are all dead”). If unemployment persists – the unemployed suffer from hysteresis (their overall productivity reduces). If uncompetitive industries (both genuinely, and as a result of currency cheating) are allowed to unravel too quickly, the economy will be unable to absorb the unemployment generated – hysteresis will ensue, together will all the other, economic, social, and political costs of large scale unemployment.

In short – there are very reasonable reasons to protect against anti-competitive behaviours by other states (in the same way we regulate such behaviour in firms – a free market requires a level playing field). Currency cheating, in addition to the deadweight loss of such an intervention, allows the cheat to subsume productive capacity in industries from those who do not protect themselves – the economies of scale are lost by the formerly productive, leading to reduced long-term productivity.

Additionally – the second part is wrong based on the actual premise “So there's more stuff to go round; Westerners will be getting a smaller share of a much larger pie” this is NOT TRUE in the case of currency cheating. Currency cheating creates a deadweight loss – there is less going around. The short-term is cheaper goods in the non-cheat and more expensive in the cheat; the long term is a transfer of overall productive capability to the cheat.

Mark Wadsworth said...

TBH, depressing the exchange value of your own currency is just another kind of mercantilism, the costs and benefits are the same as any other kind of intervention (such as import quotas, import tariffs, export subsidies, etc).

Of course there is a net loss, but my motto is give them enough rope and they will hang themselves. Over time, it must cancel itself out.

Mark Wadsworth said...

TBH, Theo clearly misunderstood the second part. This was solely about what happens when low wage countries reach western levels. which would be a very good thing.